Financial Planning / The Compound Effect
How His Old Advisor's Oversight Cost My Client $1.7 Million
| 3 min | By Heath J. Harris
A business owner sold his HVAC company and paid nearly $3 million in taxes -- even though he had a financial advisor. With proactive planning, we could have saved him $1.7 million.
A business owner sold his HVAC company and paid nearly $3 million in taxes -- despite working with a financial advisor the entire time. With proactive planning starting three to five years before the sale, we estimate we could have saved him $1.7 million. That is not a typo. That is the cost of having the wrong advisor at the wrong time.
I recently shared this story in a Yahoo Finance article about one of the most common -- and expensive -- mistakes I see business owners make when selling a company. And it is a pattern we encounter regularly at Compound Advisory, where we work with business owners across the country who are approaching or navigating a major liquidity event.
The Wrong Advisor at the Wrong Time
This client was not careless. He was smart, successful, and had professional help during the sale. He had a CPA. He had a financial advisor at a well-known firm. He had an attorney. On paper, he was covered.
The problem? His financial advisor was not equipped for the complexity of a business exit. The advisor's expertise was in managing a portfolio -- not in structuring a tax-efficient sale. There was no coordinated tax plan, no entity restructuring analysis, no QSBS evaluation or installment sale strategy, and no charitable trust, gifting, or reinvestment blueprint. They focused on managing money after the fact -- not helping the client manage the sale itself. That difference cost him $1.7 million in unnecessary taxes.
Selling a Business Is Not Just a Financial Event -- It Is a Tax Event
Most business owners underestimate how much tax can consume a sale. Between federal capital gains tax (currently up to 20 percent), the 3.8 percent Net Investment Income Tax, and state income taxes -- which in Maryland can add another 5 to 6 percent -- the combined tax burden can easily reach 30 percent or more of the sale price. On a $10 million exit, that could mean $3 million or more going straight to the government.
And here is the worst part: once the deal closes, most of these strategies are no longer available. You cannot retroactively qualify for QSBS. You cannot unwind the sale structure. You cannot create a charitable remainder trust after the gain has already been recognized. The planning window closes the moment the transaction is complete.
This is why I tell every business owner I meet: If you are even thinking about selling your company, start the planning process 3 to 5 years before the sale. That runway gives you time to implement strategies that can dramatically reduce your tax exposure.
What That $1.7 Million Could Have Done
With the right advisory team in place and a few years of runway, this business owner could have pursued several powerful strategies:
- Qualified Small Business Stock (QSBS) -- With proper entity structuring, a portion of the gains could have been excluded from federal tax entirely -- potentially saving hundreds of thousands of dollars.
- Charitable Remainder Trust (CRT) -- By transferring appreciated business interests into a CRT before the sale, he could have deferred capital gains, received an immediate charitable deduction, and created a stream of retirement income for decades.
- Installment Sale Structure -- Spreading the recognition of gain over multiple years could have kept him in a lower tax bracket each year, significantly reducing the overall effective rate.
- Roth Conversion Strategy -- Using the lower-income years before the sale to execute strategic Roth conversions, building a pool of tax-free retirement income for the future.
- Multi-Generational Wealth Transfer -- Through trust planning, gifting strategies, and estate planning coordination, a significant portion of the proceeds could have been positioned for the next generation with minimal transfer tax.
None of these strategies are exotic or aggressive. They are well-established, legal tools used by sophisticated business owners and their advisory teams every day. But they require planning, coordination, and time -- which is exactly what this client did not have.
Why This Happens So Often
The financial advisory industry is largely built around managing investments. Most advisors -- even good ones -- are trained to build portfolios, not to structure business exits. When a client comes to them with a $5 million or $10 million liquidity event, they know how to invest the proceeds. But they may not know how to minimize what gets lost to taxes before those proceeds even arrive.
At Compound Advisory, we take a different approach. Our Compound Cultivator™ process is built specifically for high-net-worth individuals navigating major transitions -- business sales, retirement, inheritance, or other liquidity events. We coordinate every piece: financial planning, tax strategy, legal structure, and estate planning. We work alongside your CPA and attorney to make sure nothing falls through the cracks.
One Sale. One Shot. Get It Right.
You only sell your business once. There are no do-overs. The decisions you make -- or fail to make -- in the years leading up to the sale will determine how much of your life's work you actually get to keep.
At Compound Advisory in Annapolis, Maryland, we work with business owners across the country through our virtual planning process. Whether you are five years away from a sale or already fielding offers, the time to start planning is now. Our complimentary Retirement Clarity Assessment is designed to help you understand your full financial picture -- including the tax implications of your eventual exit -- so you can make the most informed decision possible.
This is a hypothetical illustration for educational purposes. Individual results will vary. All investing involves risk, including possible loss of principal.